Problem 3 Suppose world described by 1-factor model (F), and we have 2 following securities ra = -0.050 – 1.2F +EA rb = 0.050 + 0.8F +ɛB a. [2pts] What are the weights on each security A and B if we want to track the asset that has a loading of 0.5 on factor F? b. [3pts) What is the expected risk-free rate in this world?
(Hint: construct the tracking portfolio that has zero loading on factor F) C. [3pts. What is the expected return of factor F? (Hint: construct the tracking portfolio that has a loading of 1 on factor F) d. [1pt] Is there any arbitrage opportunity if expected return on asset, that has a loading of 0.5 on factor F, is 4.50%?
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